How the Venezuelan crisis affects Brazilian markets

Author

Gustavo Ribeiro
February 26, 2019 • Reading Time: 7 minutes

In today’s issue: How the Venezuela crisis affects Brazilian markets. Speaker takes shots at government on pension reform issues. 

How the Venezuelan crisis affects Brazilian markets

Yesterday, South American countries once again discarded the possibility of military intervention in Venezuela. Brazilian Vice President Hamilton Mourão argues that multilateral organizations, such as the UN, might put pressure on Venezuela anti-democratic leader Nicolás Maduro, to push him out of power. The VP wants Brazil to establish a dialogue with the Venezuelan Armed Forces—whose support is key to Mr. Maduro. Defections have started, with 170 military troops abandoning their positions so far.

But besides the diplomatic and humanitarian conundrum, the Venezuelan crisis is increasingly affecting Brazil’s market. The most obvious ramification is seen in oil prices, especially after U.S. President Donald Trump tweeting about “oil prices getting too high,” reinforcing the hypothesis of military action in Venezuela—home to the world’s largest oil reserves. Yesterday, oil prices sunk after Mr. Trump’s tweet, which was especially bad for Petrobras—the company lost 2.4% of market value.

But what happens on Brazil’s northern border also affects the country’s internal affairs. Investors are increasingly worried that tensions with Venezuela might take the government’s focus away from efforts to approve its pension system reform. The incident of sending humanitarian aid to Venezuela showed how split the administration is on how to proceed—with radical sectors (including one of the president’s sons) opposing the military’s caution.

Speaker takes shots at government on pension reform issues

Rodrigo Maria, the Speaker of the lower house, has assured he is a champion of the pension reform—but not at all costs. Mr. Maia said yesterday that Congress won’t start anything regarding the much-needed reform until the government presents its plan to reform military pensions—which come under a different legal framework and generate a much larger per capita deficit than regular retirement pensions.

Moreover, Mr. Maia has openly criticized the Jair Bolsonaro administration on how it has handled the bill after presenting it to Congress. He claims that the government is letting the opposition control the narrative on social media, pointing out articles of the bill that are particularly harsh on the poor. “This criticism comes from wealthier sectors, using poor people as an excuse to defend their own privilege,” said Mr. Maia.

Once optimistic about voting on the reform by May, the Speaker now predicts at least one month of delay—and that is if the government quickly organizes its support base in Congress (which hasn’t happened to this point). The ousting of Gustavo Bebianno as the president’s liaison with Congress will make matters even more complicated, as Chief of Staff Onyx Lorenzoni and Mr. Maia don’t see eye to eye—as the former battled against the latter’s election for speaker.

Starting a company in Brazil to get easier

The government is expected to approve a measure this week to make it easier for small and medium-sized companies to open for business. A new company should now be set up in one single day, instead of 30 days. The new rule will also drop the need for a notary’s office to attest to the legitimacy of the documents presented—which can now be provided by the company’s lawyer or accountant.

The new rules will affect 96% of new companies in Brazil. The government believes that, with the expected changes, Brazil will improve its ranking in the World Bank’s Doing Business report. Latin America’s largest economy currently occupies the 109th place—and the Jair Bolsonaro administration aims to reach the 50th position in four years.

Income even more concentrated in Brazil

As the labor market remains precarious, income concentration in Brazil has gotten deeper. The Gini inequality index jumped from 0.6156 to 0.6259 over the last quarter—the highest it has been in the past seven years. The index goes from 0 to 1—with one being total inequality.

A study by think tank Fundação Getulio Vargas shows that unqualified workers have little access to promotions or pay rises. Moreover, the minimum wage has not had any real gain in purchasing power since 2015, as the GDP has stalled in recent years.

What else you should know

  • Government. The Ministry of Education has asked school heads to film their students singing the national anthem in front of the Brazilian flag. And sent a message that should be read to students, which ends with Jair Bolsonaro’s campaign slogan: “Brazil above everything, God above us all.” The measure was dictatorial in tone.

  • Vale. The Brumadinho dam collapse has hit Vale’s board of executives. One of the managers at the mining giant, who owned the collapsed dam, said the company’s top brass knew about the risks of the structure. It is the first time upper management has been directly implicated in the case.

  • Congress.The lower house has created an investigation hearings committee to dig up possible illegalities committed in contracts of the National Development Bank (BNDES) during 2003 and 2015—corresponding to the Workers’ Party era in power. During Michel Temer’s tenure as president, the bank reduced its loans to big companies—focusing instead on infrastructure and agricultural projects.

  • Workers’ Party.With his eyes on the 2022 presidential election, Fernando Haddad (the runner-up in the 2018 election) will not run for office in next year’s municipal races. Former President Luiz Inácio Lula da Silva—who remains the party’s main leader even from jail—wants Mr. Haddad to run. For him, however, there’s no upside: if he wins, he’s tied to the office until 2024; if he loses, his political capital (after getting 47m votes in last year’s runoff stage) will be gone.

  • Corruption.Operation Car Wash prosecutors have pointed out mistakes in the latest criminal conviction against former President Lula. Judge Gabriela Hardt makes mentions to the crime of active corruption (when the accused pay bribes in exchange for favors) in her verdict, when the former president was actually accused on 10 counts of passive corruption (when the accused accepts a bribe).

  • Pesticides.Brazil’s health agency is set to issue new guidelines for the use of glyphosate, the most widely-used pesticide in the country. By proposing new guidelines, Brazil indicates it will allow continued use of the substance—which has been considered carcinogenic by many countries. A California court ordered Bayer, the world’s largest glyphosate producer, to pay USD 289m (later reduced to USD 78) for causing a man’s cancer—a second major U.S. trial begins next week.

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